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Wednesday, June 21, 2017

Markets Mixed as Energy Stocks Power Down

Charles Schwab: On the Market

Posted: 6/21/2017 4:15 PM ET

Markets Mixed as Energy Stocks Power Down

U.S. stocks finished the regular trading session mixed as gains in
healthcare and technology issues were tempered by pullbacks in financial
and energy equities with the latter group finding pressure despite an
upbeat oil inventory report and amid some speculation with regard to
Chinese crude demand. Treasuries were nearly unchanged following
domestic data that showed a surprising rise in existing home sales and
mortgage applications increased. The U.S. dollar was slightly lower and
gold experienced minor gains.

The Dow Jones Industrial Average (DJIA) declined 57 points (0.3%) to
21,410, the S&P 500 Index decreased 1 point (0.1%) to 2,436, and the
Nasdaq Composite gained 46 points (0.7%) to 6,234. In moderately-heavy
volume, 829 million shares were traded on the NYSE and 2.4 billion
shares changed hands on the Nasdaq. WTI crude oil declined $0.98 to
$42.53 per barrel and wholesale gasoline lost $0.01 to $1.41 per gallon.
Elsewhere, the Bloomberg gold spot price increased $3.38 to $1,246.39
per ounce, and the Dollar Index—a comparison of the U.S. dollar to six
major world currencies—was 0.2% lower at 97.55.

Adobe Systems Inc.
(ADBE $144) posted a Q2 profit of $0.75 per share, or $1.02 ex-items,
compared to the FactSet consensus estimate of $0.92, on a 27%
year-over-year (y/y) increase on revenues to $1.77 billion, also above
analysts’ $1.73 billion forecast. For the current quarter, ADBE said it
sees revenues of $1.8 billion, matching the Street’s expectations, while
adjusted earnings per share are thought to be $1.00, above forecasts
calling for $0.97. The company’s largest segment, digital media, saw
solid gains, as well as its marketing and advertising division. Shares
closed nicely higher.

FedEx Corp.
(FDX $212) swung to a profit in the fiscal Q4, reporting earnings per
share of $3.75 for the quarter, or $4.25 ex-items, versus the Street’s
$3.87 consensus estimate. Sales were $15.7 billion, up from the $13.0
billion posted a year ago, and ahead of analysts’ estimates for $15.6
billion. Looking forward, the logistics company said it predicts
earnings of $13.20-14.00 per share for the year, in line with the
midpoint of estimates, while also saying it is looking into charging
more during peak shipping periods, such as Black Friday and Christmas.
FDX traded modestly higher.

Shares of CarMax Inc.
(KMX $60) gained modest ground after the auto retailer reported a
fiscal Q1 profit of $1.13 per share, above the FactSet estimate calling
for $0.98, on a 19.1% y/y increase in revenues to $4.54 billion, also
above forecasts. Same-store rose 8.2% during the quarter.

Existing home sales jump, mortgage applications rise

Existing-home sales in May increased 1.1% month-over-month (m/m)
to a 5.62 million annual rate compared to the Bloomberg forecast of a
decline to a 5.55 million pace, and up from April’s negatively revised
5.56 million rate. Sales of single-family homes increased 1.0% m/m and
purchases of multi-family structures rose 1.6%, and both were up y/y.
The median existing-home price was up 5.8% y/y at $252,800, an all-time
high. Unsold inventory came in at a 4.6-month pace at the current sales
rate, up from April’s 4.2 months pace and the 4.7 months rate a year
ago. Inventory of homes for sale was up 2.1% m/m, but is down 8.4% y/y
and has fallen for 24 consecutive months. Sales increased in all regions
except for the Midwest. Existing home sales are based on contract
closings instead of signings and account for the majority of the housing
sales market.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said
that sales activity expanded as more buyers were able to overcome an
increasingly challenging market. Yun said, “Current demand levels
indicate sales should be stronger, but it's clear some would-be buyers
are having to delay or postpone their home search because low supply is
leading to worsening affordability conditions," adding “With new and
existing supply failing to catch up with demand, several markets this
summer will continue to see homes going under contract at this
remarkably fast pace of under a month."

The MBA Mortgage Application Index increased 0.6% last week, following the previous week's 2.8% rise. The advance came as a 2.1% jump in the Refinance Index was met with a 1.0% decline for the Purchase Index. The average 30-year mortgage rate remained at 4.13%.

Treasuries finished nearly unchanged, as the yields on the 2-year and
10-year notes were flat at 1.35% and 2.16%, respectively, and the
30-year bond ticked 1 basis point lower to 2.73%.

Investors continue to keep an eye on the various speeches by Federal
Reserve officials after some hawkish comments coming from Federal
Reserve Bank of New York President William Dudley, as other speeches at
various engagements are slated for today and throughout the remainder of
the week. As noted in the latest Schwab Market Perspective: Goldilocks…or the Three Bears?,
we believe the market will likely largely look past the expected FOMC
rate hike, and focus more on any information with regard to the Fed’s
balance sheet. It is now expected that the Fed will begin the process of
slowly reducing its bloated balance sheet by the end of this year, but
that process (and commentary surrounding it) could be a source of
elevated volatility in the months to come. Read more on the Markets
& Economy page at www.schwab.com, including our continued belief that the bull market has legs, but why investors should be aware that risks are elevated.

Tomorrow, the U.S. economic calendar will offer weekly initial jobless claims, forecasted to have ticked higher to a level of 240,000 from the 237,000 last week and the Index of Leading Economic Indicators
(LEI), with economists anticipating a 0.3% m/m rise in May, matching
the gain seen in April. Rounding out the day will be the June Kansas City Fed Manufacturing Index, anticipated to have increased to a level of 9 from 8 in May, with a reading above 0 indicating expansion in activity.

Europe and Asia mostly lower

European equities booked a second day of losses, with markets in the
region lower across the board as crude oil was the main theme. Ongoing
Brexit talks were also a focus after negotiations officially began
Monday in Brussels. The British pound was lower as the nation is set to
begin a new parliamentary session with Prime Minister Theresa May’s
party in the minority. In a ceremony to mark the formal opening of the
new parliament, Queen Elizabeth II gave a speech, providing a framework
of what lawmakers will contemplate over its term. The nation’s
government is looking at eight new laws in order to facilitate a
smoother transition from the European Union. Amid the political turmoil
overseas, including upcoming elections in Italy and Germany later this
year, see Schwab's Chief Global Investment Strategist Jeffrey
Kleintop's, CFA, and Vice President of Trading and Derivatives, Randy
Frederick's video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com, where you can also find our article, Brexit Begins: What's Next for the U.K?.

In economic news, industrial orders in Spain fell during the month of
April, and public sector net borrowing in the U.K. declined from the
month prior. The euro also lost ground versus the greenback and bond
yields in the region were mixed.

Stocks in Asia finished lower, following in the steps of the U.S.
markets, with the drop in crude oil prices pressuring resource-related
issues and technology shares paring some recent strength, and despite
MSCI giving China the thumbs-up. Japanese equities fell, with the yen
gaining strength throughout the session, and despite a report that
showed marked improvement in the nation's production in all sectors.
Mainland Chinese shares were able to buck the downtrend in the region on
news that MSCI gave the Asian nation the green light to include its
A-shares in the company’s emerging markets indexes after rejecting its
request the prior three attempts. MSCI said it will add 222 of China’s
Large Cap stocks from last year. However, stocks trading in Hong Kong
fell on worries that China’s MSCI inclusion could spark competition and
jeopardize its role as a vital entryway to China for global investors.
Elsewhere, South Korean equities dropped and Indian securities were
flat.

Markets in resource-rich Australia fell as the tumble in crude oil
prices and iron ore hit mining and energy stocks hard. Meanwhile, banks
continued to suffer following yesterday’s downgrade by Moody’s of twelve
of the nation’s lenders, including its four largest banks. For a look
at the global economic front, see Jeffrey Kleintop's video, What's the Current State of the Global Economy? on the Insights & Ideas page at www.schwab.com, while you can also follow Jeff on Twitter: @jeffreykleintop.

The international economic docket for tomorrow will be light, offering
only business confidence and production output from France.

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